Home > > 24 March 2010 Budget Report > Income tax and personal savings

Income tax and personal savings

Income tax rates
Bank payroll tax
Life insurance policies: deficiency relief
Financial Services Compensation Scheme [FSCS]: interventions in relation to insurance contracts
UK Real Estate Investment Trusts [REIT] and stock dividends
Indexing Individual Savings Account [ISA]: limits from 2010
Income tax adjustments between settlors and trustees
Implementing the tax restriction of pensions tax relief
Pension schemes: laying of Treasury order to set the lifetime allowance [LTA] and annual allowance [AA] from 6 April 2011
Changes to pension taxation
The remittance basis: relevant person
Anti-avoidance: transactions in securities
Disclosure of tax avoidance schemes
Special guardianship orders and residence orders

Income tax rates, rate limits and personal allowances for 2010/11

The following income tax changes will have effect on 6 April 2010:

Legislation will be introduced in Finance Bill 2010 to set the basic rate of tax at 20 per cent, the higher rate at 40 per cent, and the additional rate at 50 per cent (reaffirming the current position).
The 20 per cent basic rate band will apply to taxable income up to the basic rate limit of £37,400; the 40 per cent band will apply to taxable income between £37,401 and £150,000; and the 50 per cent rate will apply to taxable income above £150,000.
The limit for the 10 per cent starting rate on savings income will remain at £2,440.
The personal allowance for those under 65 will remain at £6,475; the personal allowance for those between 65 to 74 will remain at £9,490; and the personal allowance for those aged 75 and over will remain at £9,640.
The amount of the personal allowance will be reduced for those individuals with incomes above £100,000 by £1 of personal allowance for every £2 of income above £100,000. Age related allowances are similarly abated when income exceeds £22,900.

Bank payroll tax

The bank payroll tax has been levied at the rate of 50 per cent on bonuses exceeding £25,000 paid by banks, certain financial businesses, holding companies in banking groups, building societies and similar bodies (known as 'taxable companies') between 9 December 2009 and 5 April 2010. The tax applies for all discretionary and contractual bonus awards if the bonus is paid to the employee directly or through an intermediary. The following provisions should be noted:

If a banking employee is resident in the UK for less than 60 days in the 2009/10 tax year then he or she will be outside the scope of the bank payroll tax.
The bank payroll tax applies to bonuses comprising money, money's worth, benefits and loans.
The definition of a ‘banking group' excludes any group where at least 90 per cent of the trading income in the last period of account of the group ending no later than 5 April 2010 is derived from insurance, asset management and related activities or non-financial activities, or a combination thereof. Any UK resident bank or relevant foreign bank within the group will still be a taxable company for the purposes of the bank payroll tax.
All 'taxable companies' will be required to file a bank payroll tax return by 31 August 2010. The return will set out that bank payroll tax is payable or confirmation that no bank payroll tax is payable. Penalties will apply to late filed or incorrect returns.

The Chancellor revealed during the Budget speech that the payroll tax had yielded £2 billion so far - twice the estimates prepared by the Treasury when the announcement was made in December 2009.

Life insurance policies: deficiency relief

Life insurance deficiency relief is currently available to individuals when their life insurance policy, life annuity contract or capital redemption policy comes to an end. A tax reduction may be due for the year in which the policy comes to an end if the individual has income subject to the higher rate and dividend upper rate of tax.

Life insurance deficiency relief will be extended for policies surrendered on or after 6 April 2010 to reduce income tax due on income subject to the additional rate and dividend additional rate of tax. Anti-avoidance relief will also be introduced to ensure that excessive relief is not granted.

Financial Services Compensation Scheme [FSCS]: interventions in relation to insurance contracts

The FSCS may intervene to protect policyholders with annuities or insurance contracts by providing financial assistance to an insurer, transferring policyholders' rights to another insurer, or paying compensation to the policy holder.

Legislation will be introduced to take effect on or after the date that Finance Bill 2010 receives Royal Assent to ensure that if the FSCS takes action to protect policyholders, there will be broadly the same tax treatment as if there had been no intervention. This will prevent the loss of tax advantaged status which has arisen with some FSCS interventions.

UK Real Estate Investment Trusts [REIT] and stock dividends

Under the current legislation it is not possible for a UK REIT to issue a stock dividend in lieu of a cash dividend.

From the date that Finance Bill 2010 receives Royal Assent, UK REIT's will be able to issue stock dividends in lieu of cash dividends in meeting the requirement to distribute 90 per cent of the profits as a property income distribution from the property rental business of the REIT. The recipients of the stock dividends will be taxed in the same way as if they had received a cash dividend.

Indexing Individual Savings Account [ISA]: limits from 2010

From 6 April 2010, the ISA annual subscription limit is being increased for all savers to £10,200, of which £5,100 can be saved in a cash ISA. The limit was previously £7,200, unless the individual was born before 6 April 1960, in which case it had been £10,200 since 6 October 2009.

From 6 April 2011 and over the course of the next Parliament, the ISA limits will be increased annually in line with the retail price index.

Income tax adjustments between settlors and trustees

Under the current legislation it is possible for a settlor to receive a repayment of income tax on trust income if they are liable to pay income tax at a lower rate than the trustees.
This anomaly will be corrected for repayments relating to income tax chargeable on or after 6 April 2010 - the settlor will be required to pay any such tax repayments they receive to the trustees. These payments will be disregarded for inheritance tax purposes. The enabling legislation will be introduced as soon as possible in the next Parliament.

Implementing the tax restriction of pensions tax relief

Legislation will be introduced in Finance Bill 2010 to recover tax relief above the basic rate on pension contributions made by or on behalf of individuals with income of at least £150,000. The restriction of pension's tax relief will have effect from 6 April 2011.

For individuals with annual income of between £150,000 and £180,000 tax relief on pension contributions (including employer's contributions) will reduce gradually from the individual's marginal rate to basic rate as income increases. If the level of income is £180,000 or over, tax relief on pension contributions will be restricted to the basic rate.

These rules will affect individuals with income of £150,000 or over. For these purposes, income is calculated before the deduction of pension contributions (including employer's contributions) or charitable donations.

A special annual allowance applies for 2009/10 and 2010/11 for individuals with income of £130,000 or over. Tax relief above basic rate is recovered from pension savings above an individual's special annual allowance by the application of the special annual allowance charge. An individual's special annual allowance is the higher of their regular pension savings and £20,000 (or in certain circumstances, where contributions have been less regular than quarterly, £30,000).

Pension schemes: laying of Treasury order to set the lifetime allowance and annual allowance from 6 April 2011

As announced in the 2008 Pre-Budget Report, the 2010/11 lifetime allowance of £1.8 million and the annual allowance of £255,000 will continue to apply, with their rates held constant until 5 April 2016. A Treasury order has been laid before Parliament today to put this into effect.

Changes to pension taxation

The Pensions Act 2008 places a duty on employers to ensure that their "jobholders" are active members of a pension scheme by 2012, and to make pension contributions to such a scheme on their "jobholder's" behalf.

The National Employment Savings Trust (NEST) is a Government Scheme and will be registering with HM Revenue & Customs for tax purposes and be subject to the same tax rules as other tax-registered pension schemes. The enabling legislation will be included in a future Finance Bill, to be enacted in the next Parliament. Secondary legislation may also be introduced should any unintended taxation consequences arise.

The remittance basis: relevant person

Finance Act 2008 introduced significant changes to the remittance basis of taxation. Individuals who choose to use the remittance basis will be subject to UK tax on their foreign income and gains only when they are remitted to the UK, rather than on their worldwide income and gains.

The concept of a relevant person was introduced in Finance Act 2008 to ensure that any foreign income or gains of an individual which are remitted to the UK by way of any relevant person are taxed on that individual. A close company comes within the definition of a relevant person, as does the individual, their spouse or civil partner, or their children and grandchildren under the age of 18.

From 6 April 2010, the definition of a close company will also include a subsidiary of a non-UK resident company which would be a close company if it were resident in the UK.

Anti-avoidance: transactions in securities

Legislation will be introduced in Finance Bill 2010 to replace the existing transactions in securities legislation with clearer legislation targeted more effectively at arrangements involving tax avoidance.

The scope of the new legislation will be enhanced so that it applies to certain arrangements involving close companies. The intention will be to counteract any income tax advantage involving the receipt of an abnormal dividend. The measure will generally have effect for transactions where the tax advantage is obtained on or after 24 March 2010.

Disclosure of tax avoidance schemes

Legislation will be introduced in Finance Bill 2010 revising the Disclosure of Tax Avoidance Schemes (DOTAS) and providing for increased penalties for failure to comply with the rules.

This is likely to affect promoters of tax avoidance schemes including accountancy and law firms, banks and other financial institutions and their clients, and introduces quite significant new administrative burdens on promoters of schemes and those who refer clients to promoters.

Special guardianship orders and residence orders

Certain payments to special guardians, and to certain carers looking after children under a residence order, will be exempt from income tax. The new exemption will be similar to that which applies for payments to adopters.

This legislation will be introduced in a Finance Bill to be introduced as soon as possible in the next Parliament. It will have effect for payments received on or after 6 April 2010